What is a cryptocurrency exchange?

To start investing in cryptocurrency, you must first have a source or platform where you can buy cryptocurrency. Such a platform is called a cryptocurrency exchange.

There are a number of cryptocurrency exchanges out there that offer different cryptocurrencies that can be bought using other cryptocurrencies or even fiat currency.

Read this article to know more about cryptocurrency exchanges and how they work.

What is a cryptocurrency exchange?

A cryptocurrency exchange or a digital currency exchange is a platform where traders buy and sell Bitcoins and other altcoins using other assets such as fiat currencies or other cryptocurrencies. The exchange will charge you a fee or commission on every transaction.

A cryptocurrency exchange is similar to a stock exchange or even a currency exchange that you would find at a bank or an airport.

How does a cryptocurrency exchange work?

A cryptocurrency exchange is meant to bridge the gap between a buyer and a seller.

The cryptocurrency exchange will display the market prices of different cryptocurrencies on the website. You will have the option of either placing a market order or a limit order.

Cryptocurrency Pairs

Crypto traders benefit from the changing price of different currencies.

If you think that the price of BTC against the dollar is going to increase, then you should invest in BTC/USD pair. On the other hand, if you think that BTC is going to fall, you should invest in USD/BTC pair.

Market Order

The exchange will trade your coins at the best price available in the market.

The market price of the different cryptocurrencies depends on a number of various factors such as demand and supply, number of holders, technical issues, news in mass media, economic and political factors, etc.

Limit Order

The exchange will sell your coin above the current bid or buy the coin for you below the current ask.

A limit order consists of two participants: a maker and a taker.

A maker is a trader who places a limit order for it to get fulfilled. This order is placed in the order book. Once it is placed there, it needs to be matched by another trader for the order to go through. The trader who places the order that gets filled is called the taker.

Every transaction on the exchange will be charged a transaction fee. The fee rate keeps varying and depends on the number of Bitcoin transactions being carried out on a particular day.

To start using an exchange as a trader, you have to create an account on the exchange and verify your account as well. The verification process involves uploading some identification documents that are government-approved. The verification process can take from a week to a few months.

You can link your debit/credit card, bank account, etc. to facilitate the transfer of funds to and from your crypto exchange.

What are the different types of crypto exchanges?

There are four main types of cryptocurrency exchanges:

Direct Trading Platforms

Conventional Cryptocurrency Exchanges

Cryptocurrency Funds

Cryptocurrency Brokers

Direct Trading Platforms

A seller can decide on a price range, and buyers can contact them using an Over the Counter Exchange (OTC) system. Buyers and sellers interact directly with each other. The platform does not act as a middleman.

Coinigy is an example of a direct trading platform for crypto is Coinigy.

Conventional Cryptocurrency Exchanges

Exchanges that allow traders to sell or buy cryptocurrencies at the currently available market price are called conventional cryptocurrency exchanges. You can either use both fiat and cryptocurrencies or only cryptocurrencies.The exchange acts as an intermediary and takes a fee for each successful transaction.An example of a traditional cryptocurrency exchange is GDAX.

Cryptocurrency Funds

A cryptocurrency fund is a pool of cryptocurrency capital that is accessible to outside investors that allow you to hold cryptocurrency via the fund. The fund itself will store your crypto.

Cryptocurrency funds can be public traded funds, private buy-and-hold funds, and hedge funds.

GBTC or Bitcoin Investment Trust is an example of a cryptocurrency fund.

Cryptocurrency Brokers

Cryptocurrency brokers are online exchanges where buyers and sellers can deal in cryptocurrencies at a price fixed by the cryptocurrency broker. You will also be charged with a transaction fee for each transaction made by using a broker.

Shapeshift is an example of a cryptocurrency broker.

Can I leave my currency on an exchange?

Cryptocurrency exchanges are volatile and remain connected to the internet at all times. This makes them very prone to hacking and attacks from scammers.

This is why it is always advisable to store your crypto in a wallet instead of storing it on an exchange.